Municipal bonding is up as Minnesota recovers

Bucking a national downward trend in municipal bonding, Minnesota communities have started borrowing more money in 2014.

School districts and cities wary of debt after layoffs and spending freezes during the recession are starting to look at expansions and renovations. Through September, the state is on pace for its second biggest bonding year in the past decade.

"Our unemployment rate's really low now, tax revenues are coming back, and so they're willing to stick their neck out a little bit, and issue some debt and fix some things," said Brian Olson, president of the Minnesota Society of Municipal Analysts.

Nationally, the supply of municipal bonds is near historic lows. Roads and sewer lines paid for before the recession are still sitting in the ground ready to be used, and voters have been less comfortable with debt in the slow recovery than they were in the boom years of the mid-2000s.

That's starting to change in Minnesota. In the past nine months, governments have issued $4.9 billion in municipal bonds, compared with $3.1 billion by the same time a year ago.

The rise is partly due to passage of the state's $1 billion bonding bill, but it also reflects debt issued by school districts, cities, counties and utilities. This year, Duluth is borrowing $2.3 million for a recreational center, Wayzata voters approved $109 million in bonding for its schools, and Mankato issued $1.9 million in bonds for multifamily housing.

With long-term interest rates as low as they've been in generations, local governments can borrow cheaply. Even at low rates, investors are attracted to municipal bonds for their tax benefits as well as stable, low-risk income. But the supply of bonds is still low by historical measures, and investors are clamoring for more.

Bond investors such as Heckman would especially like to see communities like those in Minnesota, viewed as fiscally sound in states with strong economies, to issue more debt.

"We have seen a pretty good increase for demand for municipals in Minnesota," he said.

In September, Dakota County issued $6.7 million in bonds for Ebenezer Ridges, a nonprofit care center expanding in Burnsville. The nonprofit will pay off the loan, but because it provides what's seen as a public good, it's able to benefit from the county's credit rating.

That bonding wouldn't have happened a few years ago, said Mark Ulfers, director of the county's community development agency.

"We weren't getting this kind of request in the recession," Ulfers said. "You wouldn't have the bonding if the economy wasn't improving."

"The reality is that we are seeing a lot of taxpayer resistance to approving infrastructure, approving new schools, approving any increase in taxes to pay for infrastructure," Heckman said.

In the spring of 2013, Republican legislators were so fed up with the idea of more public borrowing that they conspicuously read newspapers during a vote on an $800 million bonding bill to show they weren't interested.

Politics hasn't been the only reason for less bonding, said Dave MacGillivray, chairman of Springsted, a consultancy that helps local governments issue bonds and get them to market.

Communities that went through lean times during the downturn weren't as quick to borrow money for capital projects, he said. Also, they built new sewer lines, roads and schools before the recession when the economy was booming. Some of that new infrastructure was still unused, limiting the need for new bonding.

"All of a sudden the amount of growth went down and there's already stuff that's in the ground that they're absorbing," MacGillivray said.

Voters approved four out of five school district bond referendums in Minnesota in 2013, and in Wayzata this February they overwhelmingly OK'd $109 million in borrowing to build a high school addition and new elementary school, and upgrade district security and technology.

Lots of new borrowing in the near future will be for roads and bridges.

The Minnesota Department of Transportation estimates a $12 billion funding gap over the next 20 years just to maintain the trunk highway system. That doesn't include local roads and bridges and sewers.

Wayne Sandberg, Washington County's engineer, said that because his county is growing, it has been consistently issuing bonds on a four-year cycle — between $20 million and $40 million each time.

"One of the things we like about bonding is that it allows the future people moving into the county who are going to enjoy the infrastructure and the upgrades to help pay for it," he said.

"The number one need," he said, "has been highway and transportation improvements."